Virgin gets the taste for premium travellers – but monster monopolies off the menu
Published: 28 Aug 2008
Virgin Atlantic this week reported a healthy pre-tax profit for the full year to 29 February, at GBP60.9 million, up from GBP44 million the previous year.
A rise of 22 percent in "business travel" bookings saw group sales increase 9.1 percent, to GBP2.34 billion. CEO, Steve Ridgway, attributed some of that increase to passengers diverted from near-neighbour, British Airways, as the bigger carrier went through its T5 baptism of fire in the first half of the year. Virgin is to maintain its premium thrust, as economic conditions weaken.
According to Ridgway, Virgin is also well placed for cash, holding UKP838 million as of 30 June, putting it well up with the big three European network airlines in reserves. And pre-tax profit for the three months to 31 May was a healthy GBP23.5 million, against a loss in the previous May quarter, suggesting continuing strength.
As a private company, Virgin's reporting is scanty by public standards and 49 percent owner, Singapore Airlines, despite being a publicly listed company, is even less enlightening about the shareholding, which sits on its books as a SGD1.6 billion dollar investment. If it has received dividends for its investment, they are not easy to find in its annual reports – one reason for SIA's keen desire to sell out.
(SIA bought into Virgin nine years ago for GBP600 million, when Virgin's financial position was not so hot. The acquisition was to allow SIA to extend its Asian service through to New York, using Virgin metal. But last year the Singapore carrier was granted full fifth freedom rights, so any lingering logic for remaining involved with the Branson empire expired at that time. But finding a buyer – other than Virgin – will not be easy.)
With its now-strong balance sheet, Virgin is keen to play a key role in the evolving North Atlantic market, so its main public preoccupation at present is fighting off its neighbour's proposal to merge operationally with American Airlines. It sees this as the biggest threat to its own expansion plans at the still-vital Heathrow gateway. BA's filing with the US DoT indicates that as much as 50-75 percent of AA-BA's traffic over Heathrow is connecting onwards.
Any other airline which can tap into that goldmine – especially a British based one, when slots are likely to stay scarce – is on the right track. Accordingly, Sir Richard is vehemently against the "monster monopoly" that would be created, were BA and American to combine, while BA acquires Iberia as well.
But if Virgin is successful in leveraging a few slots out of BA during the approval process, it will have to contend too with enhanced competition from other interested parties. Delta CEO, Richard Anderson, this week also made it clear that it wants a handout, of at least a dozen more slots for the new Delta-Northwest SkyTeam grouping. And from here on, the competition for additional access will only intensify, increasing pressure on the BA-AA bid.
Meanwhile, the SIA 49 percent shareholding in Virgin offers a tantalising view of a real monster merger, where Lufthansa shows its hand at Heathrow by helping out a fellow Star member by taking Virgin off its hands - and bmi finally finds a buyer for its Heathrow real estate. The synergies here for the long term would help reshape global aviation.
But BA (and SkyTeam) can probably rest easy in the belief that those superpowers, intransigence and greed, will prevent such a complex nightmare scenario from developing.
(Article by Centre for Pacific Aviation)
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